Owes a lot in concept to Phillips (Phillips curve of relationship between inflation and employment) Phillips made fluid mechanics analog computer in the &#x2019;50&#x2019;s that accurately modeled British economy, nicknamed the Moniac\n\nPerformance of model checked against actual economic values. Used as valuable teaching tool\nShowed relationship of stocks & flows.\n\nDiscuss problems with individual agent modeling\n
Define econophysics\n\nPareto: 1906 compared wealth distributions for various gov&#x2019;ts The &#x2018;80/20&#x2019; rule (See graphic)\nMandelbrot:1999 Critique of stability/portfolio planning/likelyhood of events.\nYakovenko: starting in 2000 Boltzmann is gas law distribution combined with Pareto distribution\nBouchard: starting in 2000 Wealth condensation/polymer physics/state change. \nWhat does it tell us about wealth distribution? \nSays redistributive taxes and more open markets improve wealth distribution but not about how it relates to economic performance. \nProblems modeling agents.\nModels imply distribution coefficient, which Pareto expressed as exponent.\n
Possible to produce closer match and show unemployment etc. but used NACA surface to avoid complications in feeding into flight dynamic portion of model. (Show refined slide at end of presentation?)\n
Show me the trickle down\n
So much for &#x201C;The great moderation&#x201D; Lot going on that looks pretty immoderate in retrospect.\n\nGraph shows force coefficients for Pre/cost of production coefficient and growth coefficient. Model uses these coefficients in conjunction with Pav/thrust, and economic characteristics to develop model outputs.\n
Trade percentage: http://www.wto.org/english/res_e/statis_e/miwi_e/paper_june11_e.htm\n\nSwedish economy operates in much more stable mode, but in a much more variable market.\n\n\n
Explain: level flight can only be maintained in conditions within envelope.\nregions of reversed command/Bartels explanation (maybe slide?)\nNote: edit labels on graphic. \n
Discuss Minsky: hedge speculative & ponzi\n
note to self...edit graph for throttle/Pav\n
this effect measured by Bartels. \n
The Cambiant Economic Model A dynamic model of economic performance and income distribution“The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselvestoo easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is ﬂat again”. John Maynard Keynes "Many economic theories dont even come close to producing the wealth distribution we see, and if you cant produce that, youre dead in the water." J. Doyne Farmer Cambiant: from the latin Cambiare....to exchange, to trade and camber as in airfoil properties
The Cambiant model: Going with the ﬂow• The model looks at molecular interactions in an atmosphere ﬂowing over a surface, just as the airﬂow over a wing instead of modeling molecules as individual agents whose level of activity is governed by heat, as in Yakovenko et. al. and other econophysics models.• Introduces an actual ‘economic’ structure into gas models which integrates the behavior of agents and thus avoids the artiﬁcal constraints of ‘efﬁcient market’ and ‘rational agent’ underpinning much of economic modeling.• Just as in an economy, circulation is required to generate growth/lift which changes with ﬂow conditions. Flow generates forces on the surface that have direct economic relevance. Most importantly, it shows income distribution and places the economy within a deﬁned performance envelope.• For any given balance of forces, there is only one speciﬁc stable velocity, and when disturbed, the model will tend to return to this velocity, as long as the model is within its performance envelope. There is no general economic equilibrium per se, but rather a trimmed velocity to which the model, when disturbed, may return after a number of cycles, dependent on its stability.
Precursors to the Cambiant Model: Econophysics: From Pareto to Bouchard• Pareto: Power law Pareto Probability Distribution wealth distributions. The ‘80/20’ rule• Mandelbrot: Fractal geometry and Exponent market stability• Yakovenko: Combined Pareto and Boltzmann distributions Distribution• Bouchard: Wealth condensation
Creating the Cambiant structure of the economy• Surface created to approximate pressure distribution using conformal mapping aerodynamics model to match income distribution derived from CBO data and matched to NACA airfoil surface.• Flow relative to surface modiﬁed to produce 2007 data by changing angle of surface to ﬂow. (alpha)• Results then compared with data series from 1979-2007 as shown in next slide.
Comparing Cambiant model with CBO Data 1979-2007 The CBO plot (below) is produced from their time series of Quintile data plus top 10,5 and 1% of earnings 1979-2007. The peaks and contours plotted from actual CBO data match very closely to the Cambiant model output. (Cambiant model produces 32 data points per year vs. 8 points for CBO model) (Note that there is some distortion in the right hand axis of the graphs, due to formatting of the CBO data and the graph only reﬂects the population that reports taxable income...see previous slide) !The Cambiant model (above) shows the incomedistributions from 1979-2007 produced by the model.The plot was produced by varying the alpha of theCambiant model relative to the ﬂow. No other variableswere changed. (See previous slide)The vertical scale is income andthe right hand scale shows the income of the variouspercentages of the population.
Equilibrium: Balancing the Forces• The Cambiant model correlates the forces that deﬁne equilibrium or steady state in ﬂight with the analogous economic forces.• Alpha represents the anticipated level of economic performance (public/ private plus government policy).• Growth and Pre values vary with single control input, the changing alpha value.• Model shows optimum alpha values and the effects of income distribution on performance as pressure/income distributions vary with alpha value.• Force coefﬁcients for Lift and Drag drive dynamic simulation of economic performance. High Lift/Drag ratios indicate more efﬁcient economic performance at optimum levels.
Visualizing the ﬂow• Cambiant model replicates ﬂow over surface representing structure of economy.• Wind tunnel model shows actual state of ﬂow as alpha varies, from low growth/lift coefﬁcient to stall.• Conditions in the boundary layer produce pressure/income distributions. The video shows hows how various segments of the economy are impacted: wealthiest at leading edge, poorest at trailing edge.• Flow exists in multiple states depending on alpha, from low lift to separation and stall condition,where those in the separated region have no income.• Model places limits on economic performance which are deﬁned by nature of ﬂow over surface, which also deﬁnes income distribution.
Click here for Cambridge University’svisual demonstration of a wind tunnel.
Force Coefﬁcients for U.S.• Force coefﬁcients and alpha produced by model analysis of Congressional Budget Ofﬁce (CBO) data on income distribution 1979-2007.• Alpha drives coefﬁcients of performance, the growth and requirements for production coefﬁcients. Sufﬁcient production of value vs. cost of production is required to maintain a given alpha.• Lots of instability in relationship of alpha/growth coefﬁcient/cost of production coefﬁcient.• Top earnings largely driven by ﬁnancial sector.• Relationship of growth coefﬁcient to cost of production coefﬁcient shows relative efﬁciency of economy.
Force Coefﬁcients for Sweden• Force coefﬁcients from Cambiant model using Dominican income distribution database.• Mainly a trading nation with emphasis on engineering and technology.• Very different from U.S. but approaching US Alpha levels from 1979.• No instability on Alpha vs. growth/COP coefﬁcients.• Sweden’s exports account for large percentage of GDP.
Comparative Income Distribution Sweden-U.S. 1979-2007• Graphs reﬂect force coefﬁcients from previous slides.• Far more middle class wage earners in Sweden.• Swedish economy driven by export, of which engineering and manufacturing represent large percentage.• U.S. top 20% incomes mostly driven by ﬁnancial sector/ stock markets.
Cambiant model performance envelope The limits of economic performance• Forces give an envelope of performance for maximum and minimum velocity in equilibrium conditions.• Changing alpha moves along Pre curve which deﬁnes levels of performance vs. Pav.• Model imposes limits on performance, modeled by nature of ﬂow.• As with an airfoil, insufﬁcient velocity will cause economy to stall.
Stability and Debt• Debt burden is weight on the economy.• Shifting burden rearward causes instability.• Financial instability is caused when ﬁnancial instruments value is based on people and institutions with less discretionary income and marginal ability to service debt.• Examples are securitization of home mortgages, student loans, commercial paper, etc.
Model output with debt/ stability changes. Using the model to isolate one variable: stability• Model run starts with stable conditions and shifts debt to less stable condition over time, starting post ’87 crash.• Sharp impulse applied at start of crash of ’87 and .com crash. to trigger instability.• Production of value is held constant.• No other inputs, so model shows only impact of destabilizing ﬁnancial instruments.
Model simulation of Crash of 2008• Model run starts at 2008 crash.• TARP bailout preserves cash ﬂow in ﬁnancial sector.• At its peak, stimulus arrests rate of decline of asset value with increased (Pav) to a nearly stable condition.• Reduction of stimulus leads to further instability and decline. (Pav held constant)• Total asset value continues to decline at steepening rate. Pav is insufﬁcient to maintain stable conditions and any shock results in substantial instability and loss.
What the Cambiant model showsIn general: • No economy can grow without sufﬁcient capability to create value. • Income distribution is a very important indicator of economic performance and efﬁciency. A large middle class with discretionary income is vital to a consumer economy and excessive income inequality degrades economic performance. • Optimum wealth distribution depends on the structure of the economy as shown by the Cambiant surface model of the structure. It is important to note that some inequality is required for optimum economic performance. • No segment of the economy can extract more value than it creates without causing excessive drag on the economy. • Evaluating economic performance without taking into account depletion of resources, externalities and public well-being can lead to major errors in policy
What the model tells usabout economic stimulus• Recent ﬁnancial bailouts stimulated the leading edge of the economy, maintaining alpha at highly inefﬁcient ranges. Those at the leading edge are extracting too much momentum from the ﬂow of transactions causing separation and thus unemployment at the trailing edge of the economy.• Without stimulating the necessary demand to utilize the available potential production of value, stimulus results disappear with removal of stimulus.• Without creation of demand, application of ﬁnancial stimulus to maintain asset values will lead to liquidity traps and stagﬂation (behind the power curve) situations which can only be escaped by reduction of total asset value or incurring debt to fund productive investment.• Market turbulence can lead to economic stall when the economy is operated at excessive values of alpha.
The Cambiant model and policy.• There is an optimum point of wealth distribution, a ‘Bentham point’, that produces the greatest good for the greatest number for any given structure of an economy. It is clearly differentiated from the optimum capital market point, but both points are within prudent economic limits. Excess beyond this range in either direction can substantially reduce economic efﬁciency.• A given economic structure reaches a maximum ceiling in asset value, much as an aircraft has a maximum ceiling, which ceiling can only be raised by increasing the efﬁciency of the economy, or by improving its structure. Policy that maintains existing structures will inhibit changes to more efﬁcient conﬁgurations and technologies.• Economic efﬁciency can be improved by providing greater access to markets for greater numbers of participants. Excessive inequality in wealth distribution can be corrected by taxation, which if invested mainly in value-producing programs in the national interest, will allow the economy to achieve higher ‘altitude’ and asset value.
Next Steps• Develop software to allow scripted runs with complex 10 Earnings X $100,000 inputs. 9• 8 Reﬁne Cambiant surface modeling to 7 more closely model 6 employment, 2002 Model Output Earnings x $100,000 5 underemployment and unemployment. 4 2002 CBO Data 3• Reﬁne ‘aircraft’ 2 model of the 1 1979 CBO Data 1979 Model Output economy to more 0 closely tie Middle Quintile Top Quintile simulation input -1 and output to -2 Model output vs. CBO after tax income actual economic studies.